COVID-19 tax tips: how to approach CEBA claims

Tax expert gives WP the lowdown on the emergency business loan and ensuring you get 25% forgiven

COVID-19 tax tips: how to approach CEBA claims

Now the holidays are over, many small businesses are starting to turn their attention to tax season and making sure they have their books in order.

WP, therefore, has teamed up with H&R Block to address some of the main subsidies in a bid to offer some clarity and reference before tax-return deadlines.

In part one, Lisa Gittens, senior tax professional, addressed the Canada Emergency Wage Subsidy, or CEWS as it’s better known, and EI refunds. In this article, part two, she tackled the Canadian Emergency Business Account (CEBA) loan, leaving rent relief and work-from-home expenses for subsequent articles.

What is CEBA?

The CRA says that it … provides zero-interest loans up to $40,000 to small business and non-profit organizations that have experienced diminished revenues due to COVID-19 but face ongoing non-deferrable costs, such as rent, utilities, insurance, taxes and wages. Repaying the balance of the loan on or before December 31, 2022 will result in loan forgiveness of 25 percent (up to $10,000).

As described, this loan is accessible through a business account with the CRA for certain small businesses and not-for-profits. It’s designed to help cover operating costs, rent, supplies, equipment or a business could even use it for wages, as they are operating costs.

Gittens said: “It does not have a specific use, whereas CEWS was only for employee wages. CEBA also means that businesses had to show that their revenues had been temporarily reduced from the previous year.”

This is tracked compared to your 2019 returns with the CRA, with the amount of loan given related to the stated reduction on revenue. If you got the full $40,000 in 2020 and the loan is repaid on or before December 31 of 2022, 25% of the loan - $10,000, in this case - is forgiven but must be included on your 2020 returns.

This return will include your expenses – for example, $20,000 in rent, $10,000 in supplies and $10,000 for employee wages. The remaining $30,000 would, therefore, be offset. Any amount that is not used to cover expenses, the business owner must pay tax on.

Gittens said: “The loan is essentially non-taxable for the employers. That’s how it was branded when it went out - this is non-taxable, you're just going to get this loan. But the forgiven amount, the 25%, that they said would be forgiven is in fact, taxable in the year that it's received.

“So, as a small business owner, if you can show that expenses exceeded the $10,000 (25%), there's nothing for you to pay tax on. If you report your expenses, your taxable income then goes to zero. If you got the loan, for the 25% that's taxable ($10,000), and your expenses were only $5000, this means you have $5,000 you did not use for expenses - that’s what you're going to pay tax on.”

She added: “This is not really being given to you as top-up income. It's being given to you as a loan that is replacement income because your expenses did not change. And rather than having a small business that now has this massive loss, not only on their taxes but with the financial implications of it going into the red, here is a loan.

“The purpose of this loan really is to cover your expenses, not necessarily to give you any kind of profit that you would be paying tax on.”